AT THE END OF ST. PADDY'S RAINBOW: NEW ENERGY

The urgent logic of New Energy? Double Green: Good for the environment, good for the bottom line. And it becomes Triple Green on St. Patrick’s Day when The Green Exchange begins trading emissions credits.

In a troubled financial market, there is yet another urgency: The emissions market appears to be uncorrelated to other markets. So the rise of emissions trading also means there is a place for money to migrate where growth can still be expected.

The best news: As the value of emissions credits goes up, everybody will want to earn them by building and using more New Energy. Erin Go Bragh!

The Green Exchange is a step toward a mandatory national cap-and-trade system in the U.S. to control emissions. Senators McCain, Obama and Clinton are all backers of legislation for such a system soon to be considered by the U.S. Congress. The idea is to put a rigid cap on the spew of emitting businesses and industries and fine them big time for exceeding the caps.

Theoretically, this brings market forces to bear on the problem. Rigid caps would immediately hold national emissions right where they are. Then the caps could be ratcheted down, lowering national emissions across the board.

Businesses and industries would have several incentives to cut emissions: First, to avoid the fines over over-emitting; Second, to add to their incomes by selling credits they don’t require on the emissions trading market; Third, by investing in efficiencies and New Energy sources, to generate more excess credits to sell, thereby upping revenues further.

Credit buyers in the markets will be emitters who cannot otherwise conduct business. Such business will, however, be disincentivized by cap-and-trade.

Proper regulation will be crucial. Improper regulation could allot emitters too many free credits, failing to reduce across the board emissions or effectively incentivize reductions. In 2006, undeveloped regulatory skills knocked the European Union Emissions Trading Scheme (EU ETS) for a loop. That hard lesson has been learned. Europe’s failures are recognized in all of the congressional cap-and-trade plans.

Research firm New Energy Finance (no relation to NewEnergyNews) predicts a mandatory national market could reach $1 trillion by 2020.

Economists don’t like cap-and trade as much as they like an emissions tax but most recognize new taxes are politically non-starters. Electorates can't be sold on the obvious logic of a gas tax. A lot more education would be necessary to sell an emissions tax.

Celebrity footnote: Financial giant Lehman Brothers’ green investment initiatives are overseen by Theodore Roosevelt's great-grandson.

Major financial institutions start looking for their pot of gold in the NYMEX emissions market starting on St. Patrick's Day. (click to enlarge)

The Greening of Wall Street; Tackling the carbon crisis amid the credit crisis
March 13, 2008 (The Economist)

WHO
The New York Mercantile Exchange (NYMEX), Evolution Markets; Morgan Stanley; Merrill Lynch; Chicago Climate Exchange (Richard Sandor, founder/operator); European Union Emissions Trading Scheme (EU ETS); New Energy Finance; Ceres; Citigroup (Citi); Bank of America (BofA); JPMorgan Chase

This might be the gold they find. (click to enlarge)

WHAT
The Green Exchange, a joint venture between some of the most influential financial institutions in the world, will begin trading “carbon-linked derivatives contracts.”

WHEN
- The Green Exchange begins trading March 17.
- 2007 world emissions trading markets value: €40 billion ($62 billion).
- Potential 2020 U.S. emissions trading market value: $1 trillion.

Emissions trading starts on NYMEX's Green Exchange on St. Paddy's Day. (click to enlarge)

WHERE
- Trading will be via NYMEX, the biggest commodities exchange in the world.
- The EU ETS is the biggest emissions credit trading exchange in the world.

WHY
- The New Energy Finance prediction of a trillion dollar market by 2020 does not include derivatives, which could boost trade much higher.
- The bulk of the action is presently in the EU ETS and Europe-based banks are leading the market. That is why U.S. financial institutions are backing The Green Exchange.
- Citigroup pledged $50 billion to green initiatives over 10 years and specified $31 billion will go to clean technologies.
- Bank of America (BofA) pledged $20 billion and will price emissions (at $20 to$40/ton) as part of emitting industries’ loan requests.
- Citi, JPMorgan Chase and Morgan Stanley announced “carbon principles” to estimate emissions costs in loans. (See BANKS DEMAND EMISSIONS STANDARDS)
- BofA inititives: green credit cards (purchases earn offsets), green mortgages ($1,000 cashback for energy-efficiency), $3,000 to employees who buy hybrid cars.
Hedge funds and big investors are circling.

The Green Exchange logo says it all. (click to enlarge)

QUOTES
- Mark Tercek, green guru, Goldman Sachs: “[The role of financial institutions dealing with emissions generators is] not to disengage, but to make bad situations better.”
- Mark Fulton, Deutsche Bank: “Green mutual and exchange-traded funds are booming…”
- Steve Milloy, climate change skeptic, Free Enterprise Action Fund: “[The bank initiatives are] at best greenwashing, and at worst value-destroying…”